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FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience

At a mid-sized bank, the business unit that originates corporate loans is responsible for identifying and managing the operational risks arising from its own activities, including running day-to-day controls. Under the three lines of defense model, which line does this unit represent?

The loan origination unit is the first line of defense. Under the three lines model, business units that take on risk own it and manage it daily, including operating controls. Independent risk and compliance functions form the second line, while internal audit forms the third.

  1. AFirst line of defenseCorrect
  2. BSecond line of defense
  3. CThird line of defense
  4. DExternal assurance providers such as the regulator

Explanation

In the three lines of defense model, business units that take risks own and manage them, including operating controls. The second line is the independent risk and compliance function that oversees and challenges. The third line is internal audit, which gives independent assurance.

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